Engulfing Candle Pattern Explained (real chart examples)

Engulfing Candle Pattern Explained (real chart examples)
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The Engulfing Pattern is a candlestick chart pattern which signals a potential reversal in the market. In this article we will show you how to identify it in the right market position with real chart examples. We also include a link to a free MT4 indicator download.

The Engulfing Candle Pattern is a two candle pattern which signals a reversal in the market. The Pattern can be Bullish or Bearish depending on where it forms.

Bullish Engulfing Candle Pattern should be identified as a signal when occurring in a down-trending market or at the bottom of a range. Bearish Engulfing Candle Pattern should be identified as a signal when occurring in an up-trending market or at the top of a range.

Engulfing Candle Pattern Criteria:

  • Two candlesticks comprise the engulfing patterns. The second real body must engulf the prior real body (it need not to engulf the shadows).
  • Bullish Engulfing: The second candle is a green (bullish) candle.
  • Bearish Engulfing: The second candle is a red (bearish) candle.
  • The second real body of the engulfing pattern should be the opposite colour of the first real body.

Additional notes:

  • Bullish Engulfing: The market must be in a clearly definable down-trend even if the trend is short term.
  • Bearish Engulfing: The market must be in a clearly definable up-trend even if the trend is short term.
  • If the first session of the engulfing pattern has a very small real body and the second day has a very long real body then this may reflect the slowing of the prior trend’s momentum. This may be an indication of increased force for the new trend.
  • If the Engulfing Pattern appears after an extended trend then traders may have already entered looking for a reversal and the Engulfing Candle Pattern may lack volume to create a reversal.
  • A fast move prior to the Engulfing Candle could mean that the market is overextended and vulnerable to profit taking.
  • If the second (engulfing) candle engulfs more than one session’s previous real body then this may be a stronger signal.

Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.

The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.

No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the the classification table for this pattern:

Bullish Engulfing Candle Pattern Classification Table

Number of Candles In Pattern 2
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bullish
Market Conditions: Range, Down-trend, Up-trend Down-trend, Ranging
Position: Top, Bottom, Range Bottom

Bearish Engulfing Candle Pattern Classification Table

Number of Candles In Pattern 2
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bearish
Market Conditions: Range, Down-trend, Up-trend Up-trend, Ranging
Position: Top, Bottom, Range Top

What Price Action Does The Engulfing Candle Pattern Represent?

All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.

Bullish Engulfing Candle Pattern

The Bullish Engulfing Candle Pattern forms when a candle opens with a gap down (the open is below the close of the previous candle). The market then rallies up and closes well above the previous candle’s open.

This indicates that the bearish trend may be rejected and a reversal of the trend may occur. If the first candle has a relatively small real body and the second is relatively large, it could provide additional indication of the trend running out of steam.

Bearish Engulfing Candle Pattern

The Bearish Engulfing Candle Pattern forms when a candle opens with a gap up (the open is above the close of the previous candle). The market then falls and closes well below the previous candle’s open.

This indicates that the bullish trend may be rejected and a reversal of the trend may occur. If the first candle has a relatively small real body and the second is relatively large, it could provide additional indication of the trend running out of steam.

Engulfing Candle Pattern Example With Confirmation

As with any candle pattern or signal, it is always more significant when there is confirmation from another indicator or via forming at a key level.

In the example below of the FTSE100, the market was in an up-trend which had some momentum before slowing as it approached an area of resistance at the round number level of 7700.

Hint: It is always good practice to look for confirmation for any signal that you are looking to trade.

The market attempted to break through and was rejected via the formation of the Bearish Engulfing Candle Pattern and the market reversed back to the level where the strong move up started.

This confirmation can help the trader to feel more confident in the signal and the potential for a good trade.

Bearish Engulfing Candle Pattern Example With Confirmation Example
Bearish Engulfing Candle Pattern Example With Confirmation Example

Note: you can get a free round level indicator for MT4 from us here: Round Levels MT4 Indicator.

In What Market Conditions Does The Engulfing Candle Pattern Become A Signal?

To recap, the Bullish Engulfing Candle Pattern can be seen as a potential signal when forming at the bottom of a down-trend or the bottom of a range. It is preferable to see a sustained down-trend which loses momentum prior to the formation of the Engulfing Pattern.

The Bearish Engulfing Candle Pattern can be seen as a potential signal when forming at the top an up-trend or the top of the range. It is preferable to see a sustained up-trend which loses momentum prior to the formation of the Engulfing Pattern. Let’s look at a couple of real chart examples.

Bullish Engulfing Candle Pattern In A Ranging Market

A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways, balancing or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.

Ranging Market Example
Ranging Market Example

As you can see in this example of the EURGBP, the market was ranging and a Bullish Engulfing Candle Pattern occurred at the bottom of the range with a good example of a small preceding bearish candle forming the first of this two candle pattern.

This helped to confirm the bottom of that leg down. This pattern is not a good signal in a ranging market but seeing it in this position may give an indication that the bottom of the range is unlikely to be broken.

Bullish Engulfing Candle Pattern In A Ranging Market Example
Bullish Engulfing Candle Pattern In A Ranging Market Example

Bullish Engulfing Candle Pattern In A Down-Trending Market

A down-trending market is one where the price action generally moves down over time and is characterized by lower lows and lower highs.

Down-trending Market Example
Down-trending Market Example

As you can see in this US500 example, the market was down-trending. The market tried to push below the previous low and was rejected with the formation of a Bullish Engulfing Candle Pattern. The market reversed and went higher.

Bullish Engulfing Candle Pattern In A Down-Trending Market Example
Bullish Engulfing Candle Pattern In A Down-Trending Market Example

Bearish Engulfing Candle Pattern In A Ranging Market

In this US500 market example we can see how the Bearish Engulfing Pattern marked the top of the range on several occasions.

As there is no up-trend in place, the pattern cannot signal a reversal so is not a good signal to short but can be used as an indication that there is resistance at that level.

Bearish Engulfing Candle Pattern In A Ranging Market Example
Bearish Engulfing Candle Pattern In A Ranging Market Example

Bearish Engulfing Candle Pattern In An Up-trending Market

An up-trending market is one where the price action generally moves down over time and is characterized by higher lows and higher highs.

Up-trending Market Example
Up-trending Market Example

In this US30 example below the market was in a sustained uptrend. The bullish momentum started to run out of steam with the formation of smaller bullish candles.

The Bearish Engulfing Candle then formed signaling a potential reversal. The market then had a period of consolidation before reversing and moving down.

Bearish Engulfing Candle Pattern In An Up-trending Market Example
Bearish Engulfing Candle Pattern In An Up-trending Market Example

Engulfing Candle Pattern MT4 Indicator Download (free)

If you trade using MT4 then why not try out our free MT4 indicator? The indicator will scan the market based on the criteria shown in this article and identify them on the chart.

There is also an alternate version which can show the signal in a separate indicator window of the chart if that is your preference. To download the indicator, follow this link: Engulfing Candle Pattern MT4 Indicator.

Related Candle Patterns

As mentioned above, when an Engulfing Candle Pattern forms which engulfs more than one prior candle, it can be a stronger indicator of a potential reversal.

We have articles and indicators for two such variations which you can access via the links below:

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

Interpretation Of Candle Patterns:

It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.

No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.

But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them.

Best practice guide for trading of candle patterns:

  • No pattern is ever perfect. Be aware that patterns will form slightly differently each time and in different markets.
  • Use them as consistently as possible. Even though you will never find patterns exactly the same, you should always implement a consistent ruleset when identifying and using patterns.
  • It is never a guarantee, only an indication.
  • Make sure you are using it in the right context. For example if it is a continuation pattern then don’t use it to trade reversals!
  • Use multiple signals (confirmations) to have more confidence in your trading.

More About Candlestick Patterns

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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